Is estate tax planning still needed?

“With this pandemic and all the deaths happening near us, you don’t really know when you will be ‘taken’.” This was the reasoning of my physically fit friend and golf buddy in his 50s who sought my counsel to tax-efficiently transition the titles of his properties over to his children. He wanted to treat it with some urgency. I thought, maybe I should indeed, give the advice urgently because “you don’t know when you will be ‘taken’” applies to both parties in this consultation.

Might as well do a piece on this for my readers this Sunday because we all don’t know when, right?

In estate planning, almost all of us can be dismissive about it, that it’s the problem of the very affluent or those who will leave properties worth fighting for. But when you talk of estate tax planning, you can’t dismiss it, even if you have less. Not when you convert the little estate savings and realize that the amount saved can buy a car or change the entire roofing over your house or buy gadgets for the entire family.

Here are some thoughts:

1. Sell, bequeath or give

When we are talking of land, which is a capital asset (residential property or held for investment, but not used in business), any which way you transition is subject to six percent on the fair market value (FMV). For tax, the floor FMV is the zonal value or when there is no zonal value in the area yet, then the market value that appears in the real property tax declaration of the property.

People are used to just selling the property to pay the lower six percent capital gains tax because under the old tax law, estate tax and donor’s tax rates are much higher. Note, however, that even today, selling to your children or heir but not collecting the proceeds can technically result in two tax bites: the six percent capital gains tax on the sale and then, the six percent donor’s tax on the selling price that you don’t collect or waive.

Maybe you would be better off by simply waiting (to be “taken”) for succession to set in because estate tax is also six percent of the zonal value of the property, and the estate can be entitled to deductions (like the P5 million standard deduction and the value of the family home up to P10 million).

Donation today should not be dismissed outright as it may, in fact, be the right mode. While it is of the same rate, you are able to control the cost because it is based on the zonal value of the property today not 10, 20 or 30 years when you pass on in the future when the value of the property can be so much higher.

2. From individual to one-person corporation (OPC)

If your properties are earning, such as real properties being leased out, and you are an individual, you can pay the fixed eight percent tax if your annual revenue is less than P 3 million. In this case, you can stay as an individual. If you are beyond this income threshold, it pays to be a corporation. You can take advantage of more deductions because a corporation can deduct direct costs (if you’re a lessor, these are depreciation and repair costs), plus other business expenses. But in lieu of these other business expenses, an optional deduction of 40 percent of gross income (revenue less direct costs) can be taken instead. Note that there are no receipts needed to substantiate the optional deduction.

Courtesy of the new tax law, you can transfer your property to your OPC tax-free, and you don’t need a BIR ruling to get an exemption. You are also able to limit liabilities to the extent of your assets in the OPC vs being liable up to your personal assets as an individual.

3. If you are a foreigner, this part is a must-read

There are several cases in court and so many more that didn’t go to court regarding a foreigner’s right to recover his investments in land bought in the name of his Filipina partner. Some use only their excess funds, but some use up their retirement money to invest in real property here. Since foreigners cannot own land in the Philippines, the property is bought in the name of the Filipina. If they are not married, it appears co-ownership rules may apply on properties bought by pooled funds, but no. When the relationship turns really sour, the foreigner cannot even seek any reimbursement for even half the value of the property from the Filipina.

The court has ruled that since it is illegal for the foreigner to buy land in the Philippines, he cannot come to court with clean hands. And since land ownership by a foreigner is void, there is no implied trust created on the funds, so he loses everything. He can only get his hands on the property if he marries the Filipina who later dies before him, because he can be qualified to inherit private land.

Otherwise, foreigners should stick to buying condominium units. Or, if they must buy land, make that a formal business arrangement with the Filipina as his business partner. As a corporation, the foreign individual shareholder can indirectly own land up to 40 percent.

As for the above cases where the Filipina got all the real property titles issued under her name to begin with, she can say estate tax planning is loose change. I have also seen there is much bigger value in faithfulness and fairness.

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Alexander B. Cabrera is the chairman and senior partner of Isa Lipana & Co./PwC Philippines. He is the chairman of the Integrity Initiative, Inc. (II, Inc.), a non-profit organization that promotes common ethical and acceptable integrity standards. Email your comments and questions to [email protected].